Cap Table Modeling: Understanding the Mechanics of Equity vs. Convertible Debt

Cap tables are an important concept for entrepreneurs to grasp when taking outside financing. A cap table is a schedule that lays out the ownership stakes in an early stage company. They typically take the form of a spreadsheet that changes over time as more capital is raised and more investors become involved in the growth of a company. Cap tables can also vary based on whether the capital is raised through equity or through convertible debt (debt that converts to equity at a future point in time).

Much has been written on the merits and challenges of both equity and convertible debt. There are a number of great posts that explain each at a high level and then go on to take a stance on which method is preferred and when. A number of notable investors have weighed in on the topic through a variety of posts including: Fred Wilson, Mark Suster and Josh Kopelman. All of these posts do a great job of explaining the mechanics of each financing option and provide sound reasoning around when (and when not) to use convertible debt vs. equity.

The problem with these sources, is that rarely do they actually dive into the mechanics of building a cap table from scratch and modeling out the differences over time of equity vs. convertible debt. Of course, there are courses taught by organizations such as Wall Street Prep that do extensive training around cap table modeling. While these courses are great, they tend to be a) very expensive b) time-consuming and c) highly detailed-oriented (too detailed for what most entrepreneurs are looking for). So what do you do if you’re an entrepreneur who wants more than just a high level understanding of the pros and cons of various financing options but doesn’t want to pay a premium for a time-consuming, detail-heavy course?

I recently came across a great resource put together by my Professor at CBS and 37 Angels founder, Angela Lee. Professor Lee has built a step-by-step guide to modeling out cap tables for equity and convertible debt deals (both when the discount or cap come into play). The guide, which is posted below, provides detailed instructions on how to calculate the various components of a cap table (shares owned, share price, % owned, etc.,) across various rounds of fundraising. Although the tool is simplified, it provides an intuitive way to model various financing scenarios and their implications for your ownership over time. Hopefully this sheds a bit more light on the mechanics of how cap tables are put together. Big thanks again to Professor Lee!

37 Angels Cap Table Template